Hundreds of millions of pounds of taxpayers’ money is being exposed to the risk of Third World corruption every year, the public spending watchdog has said.

The National Audit Office (NAO) warned it is unclear how much aid money is being misused because the Department of International Development (DfID) has insufficient checks in place.

But it stressed that most of the recipients of £461 million of direct financial aid in the last year have major problems with corruption.

The Tories accused the Government of playing down the risks after the NAO said DfID’s assessments rarely quantified the figures involved.

In a report, the auditors acknowledged that direct financial support could help countries improve services by giving them control of how resources were used. But it added that it was not clear whether it was a more effective use than channelling the cash into specific projects.

It urged DfID to improve its appraisal and management of budget support and provide a more accurate picture of the value for money obtained. The report said the effective use of aid cash depended on developing countries’ own governance.

However, it also found that DfID does not always make clear what is expected to be achieved in return for support. More than a fifth of cases lacked baselines against which to measure progress, while 15% of indicators had no upper time limit.

“Although budget support may deliver several benefits, it also carries significant risks,” the NAO said. “For example, developing country governments may not be capable of using UK funds efficiently and effectively or may misuse them for political reasons or through corruption.

“DfID has played a leading role in developing and using risk assessment tools, which pay specific attention to corruption, but could be clearer in setting out the extent of risk to UK funds. For example, only two risk assessments carried out by DfID country teams estimated the extent of losses due to corruption.”

They were Tanzania and Ghana, where 20% is thought to have been lost to corruption.